Buying a House on a Shoestring Budget
I know that owning a house isn’t for everyone, and I’m not here to try and convince you that it is. What we do know is that owning a home and paying your mortgage is one of the best ways to incrementally increase your net worth. If you agree and want to buy a house but feel like you can’t because of the upfront costs, we hear you.
This isn’t an article to persuade you to do something. Here at Generation Capital Management, we don’t sell mortgages. We don’t sell houses. Our business is you. That’s why when I say that it’s possible to buy a house with little to nothing out of pocket, you should at least pay attention.
Renting is a vicious cycle, right? Each month you’re paying more than you would for a mortgage and all that you’re doing is lining someone else’s pocket. The increased cost of renting (versus what you would pay per month for a mortgage) prevents you from being able to save for a home purchase. It’s a way of other people making money from you and preventing class mobility. I’m over that, and if you are too there might be a way that GCM can help.
If homeownership is a goal of yours, lower interest rates make now a very opportune time to make some moves. If you can remove the down payment and closing cost barrier, what else is stopping you? Here are a few tips to help you if you don’t have much cash sitting in the bank, but buying a house is on your radar.
1. Look for some first-time homebuyer programs in your area
These vary by state, county and even town but many banks offer programs that help households save up money towards a down payment and closing costs. The problem with these programs is that they can often take months to complete before you can even start looking for houses, and they often require the use of a conventional mortgage with the particular bank that offers the program. That makes shopping for a more attractive mortgage rate less feasible. And being forced to use a conventional mortgage often means 3-5% down payment at a minimum plus closing costs. It’s worth considering, though.
John’s Top Tip: Credit unions and regional banks often have some of the best first-time homebuyer programs. These groups are less likely to sell your mortgage to a third party once it’s closed. (Selling mortgages is a very common practice amongst banks and it’s not a big problem for the homeowner, but it can mean setting up new autopay and similar administrative tasks. It’s best to avoid it if possible.)
2. Look at mortgage programs other than conventional mortgage
This whole bullet point qualifies as a “John’s Top Tip”, so hear me out: if you’re looking to spend as little out of pocket as possible on your home purchase then a conventional mortgage might not be your best bet. If you aren’t familiar with mortgage programs (and why would you be if you’ve rented most of your adult life?), banks offer a variety of mortgage programs which all have different down-payment and qualification requirements. The most common type is the “conventional” mortgage which typically requires about 5% of the purchase price as a down payment.
There are other mortgage programs though, and (interestingly enough) some of them don’t require any down payment on the property! The example that I’m going to use here is the USDA loan program because that’s the one with which I’m familiar. There are other programs too (like the VA loan program) that allow for a 0% down payment on a house.
The USDA loan program encourages buyers to purchase homes in rural areas. The loan is incredibly flexible, but it does have income limitations (around 115% of the median income for the area or under depending on household size). You also must make sure that the property in which you are interested qualifies as a USDA property. You can do that by visiting their property checker here.
So, if you found a home that was eligible for the USDA program, you could put in an offer with 0% down payment and finance the entire cost of the home.
3. Ask the seller for a seller’s concession
Still need help with closing costs? Well you’re in luck!
(This wouldn’t be a very good guide if we didn’t advise you on reducing some of the biggest up-front costs in buying a house.)
In almost every type of loan you can ask for the seller to help you with closing costs through what’s called a “seller’s concession”. The way that this works is that the buyer and the seller agree on a price and the buyer asks the seller for a certain amount of that selling price BACK as a closing cost credit. In essence, the seller is helping you to cover closing costs out of the proceeds from the sale of the house to help sweeten the deal. You’ll have to include this request for a seller’s concession in your offer, though.
In a USDA loan, for instance, the seller can provide a maximum 6% concession and that concession can go entirely towards reducing your closing costs. On a $100,000 home, that would amount to $6,000 towards closing. If that can cover your total closing costs, you’re already in a position where you can pretty much pay nothing out of pocket for this purchase (yes, it really does work like that).
John’s Top Tip: It’s a seller’s market right now so a seller might not be willing to take an offer with a seller’s concession. You must weigh your priorities. Is getting into this house the priority for you, or is finding the right deal that lets you put as little money out of pocket the priority? The latter might take more time, but don’t let a lender or realtor pressure you out of doing what’s right for your financial situation.
4. Ask the bank if you can finance any of the closing costs or if they will give you a closing cost credit for a slightly increased interest rate
Closing costs still not quite covered? I hear you there. Your lender might be able to help. Ask them about “closing cost credits” or other assistance towards your closing costs. They might offer to cover some of your costs for a slightly increased interest rate.
Is this okay? In my mind, yes. When you’re buying a home and you’re struggling, having cash in your pocket is more important than a slightly lower interest rate over 30 years. With interest rates as low as they are right now, you can likely afford a slightly higher rate over the life of your loan. Which leads me to my next tip…
5. 30-year vs. 15-year mortgage
The duration of your mortgage is a personal choice, but if you are trying to increase your financial stability I would generally recommend a 30-year fixed-rate mortgage. The interest rate on a 30 is generally higher than a 15 but the 30 will give you a lower monthly payment. You can always increase how much you’re paying on a monthly basis if you want (and can afford) to close out the mortgage in less than 30 years.
John’s Top Tip: The most important thing to focus on if your finances are compressed is giving yourself financial flexibility. That means keeping your required payments as low as possible. If you choose the 15-year mortgage and you lose your job, your payment is much higher and you need to find a way to cover that payment while you aren’t working. The lower payment with the 30-year mortgage will give you greater overall flexibility.
6. Ask your mortgage officer if you and the bank can share an attorney
Back to closing costs: If you’re looking for another way to reduce closing costs, ask your bank if they will share an attorney with you. Costs are typically lower because the attorney is already making the trip to the closing and it’s only a slight addition to their time to represent two parties instead of just one.
Some might argue that this presents a conflict of interest and this is fair. If there’s a dispute between you and the bank, the attorney may be in an awkward position. Your mileage may vary, but the risks are very low.
John’s Top Tip: Most lenders will allow you to choose which attorney that you and the bank will share. Ask your realtor or a friend for a good recommendation. Then ask the attorney point-blank what their fee is so that you’re aware.
7. Find a good realtor—the seller is paying for it
Don’t try to buy a house without a realtor—there’s absolutely no reason for you as a buyer to go it alone. The seller pays 100% of the commission for the seller’s and buyer’s agent out of the proceeds of the sale of the property.
John’s Top Tip: Realtors vary significantly in quality. Ask your friends for recommendations. Your realtor is super-duper important as a good one will advocate for you. DO NOT use the listing agent for the property that you’re interested in buying as that presents a huge conflict of interest. If there is no other agent involved in the sale other than the seller’s agent, the seller’s agent gets the full commission from the sale of the house (usually around 6% of the final selling price of the house) instead of splitting it with the buyer’s agent. Again, as a buyer you don’t pay a dime for the realtor’s service, so make sure that you’re covered.
8. Negotiate to keep the appliances in the house
This one might be obvious to you, but it bears mentioning: if you’re coming from an apartment and don’t have any appliances make sure that the home you’re purchasing comes with its appliances. This will be listed in the property condition report. Your realtor should be able to tell you if the appliances are included.
9. Be sure to discuss your plan with your landlord
Finally, make sure that you’re clear with your current landlord what your thoughts and intentions are once you start looking for a house. They might allow you to move to a month-to-month arrangement or strike some other deal that will allow you to get your security deposit back. Most landlords are interested in keeping good tenants for as long as possible and each month that they know you’ll be living in the apartment is another month where they don’t have to look for another tenant.
Review your lease and open a discussion with your landlord. Be clear with them and give them an approximate timeframe for your departure. They should work with you.
John’s Top Tip: Home closings rarely happen in the timeframe initially proposed. Not having a place to stay if your closing gets delayed is a nightmare. Give yourself a little flexibility. This might mean carrying both your current rental and your new house for a month, but the peace of mind is worth it.
There’s a lot here and there’s even more to share. Reach out to us at Generation Capital Management for some help with buying a house whether you want to keep out-of-pocket costs down or not. I’m passionate about this topic because this is the exact method that I used to purchase my first home. And doing so really improved my finances in the long run.
